A bi-weekly publication in support of informed public discourse. Our inspiration is I.F. Stone’s weekly, a digest published from1953 to 1971 that made sense of the news coming out of Washington. 

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Vol 1, No 1  March 29, 2017

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The Future of Oil

As we see it:

  • No one should discount the importance of oil in today’s turbulent world. Neither should one discount the impact of oil production/costs on political events (and climate change), all the more so because, with Rex Tillerson’s (formerly of Exxon Mobil) ascent into the US Cabinet.

  • Big oil is back in power, and is also major player in Canadian politics, especially but not exclusively in Alberta.

  • No one can predict either whether or when oil prices will go up or down, regardless of what is claimed.   In part this is because once a mine or facility has been built (or mainly constructed), the costs fall dramatically.  As Tillerson himself says, “one might as well keep oil flowing, with the expectation that prices will eventually rise.”  Shell’s chief financial officer recently also said: ” ..the incentive is to keep producing ‘flat out as you can’ once investments have been sunk into the ground ..It is more expensive to stop production than to keep pumping at low prices because of the high costs of mothballing wells.”

  • Saudi Arabia’s and Iran’s cost of producing oil is less than $10 barrel. Canada, Brazil Nigeria Venezuela costs are all well over $20.  Crude oil of the sort produced in conventional Alberta costs about $15 a barrel to produce: the Tar Sands produce oil at somewhere between $60-100 a barrel.   Fracking costs have come down dramatically and production is now up, despite bankruptcies of some “cowboy” and underfunded firms.  US shale now comes in around $30 a barrel, due to new technologies, just below the cost of Russian oil.  Oil from North Dakota comes in at less than $40 a barrel. Today’s price is approx. $51 a barrel, USD.  (WSJ, Rystad Energy Ucube))

  • How much oil there is on the market today (and the resulting low price) has often been said to be simply a result of Saudi Arabia increasing production (true) to push down competitors, especially the US shale producers. However, pricing is never the result of one factor.  It is a combination of  factors including the complex political relationships among Saudi/Iran/Russia and within OPEC itself, and well as the adoption – or not - of environmental policies and the introduction of new technologies. 

  • Two things are clear from all reports: falling oil prices should, in theory, result in economic benefits; in practice, this is anything but a sure thing. And, secondly, the impact of lower oil prices is different dependent upon how oil-production based a country’s economy is.  The USA is becoming self-sufficient in oil, and while oil is important to the US, it is not an oil-based economy.

  • Many of the analyses here reflect assumptions pre-Trump, and pre-resurgence of big oil.   Much has been made in articles we read of environmental pressures and agreements, increased urbanization (less reliance on cars) and the pressure of oil companies having to store large surpluses in predicting a shift away from oil.  Today, many of those assumptions are in doubt.

8 reasons why the politics of oil have changed
Katrinka Barysch, Director of Political relations, Allianz SE

World Economic Forum, Feb 2017

  • Oilis not a scarce resource any more; the battle is about “global market share.

  • Politics between Saudi and Russia and between Saudi and Iran (quickly becoming a major producer) may be major determinants of current oversupply, and thus the downward pressure on oil prices.

  • OPEC is unlikely to be revived as a major force, given conflicts among its members.

  • Most of the big oil player countries are both major producers and major consumers of oil.

  • The uncertainty about whether future government policies will reflect the Paris Agreement (Climate Change) creates incentives to take the oil out of the ground now. For this and other reasons, big producers are pumping at almost full capacity, notwithstanding the currently low price.

  • Lower oil revenues in countries heavily dependent on oil production potentially lead to domestic instability: Venezuela, Ecuador, Nigeria, Brazil and Central Asia.  Russia has recently cut public spending a further 10% and Nigeria has used up its oil-stabilization fund.

  • The USA is headed towards self-sufficiency in oil, thus might have less of an interest in attempting to “stabilize” governments in the Middle East. The US increased oil production more than any other country in 2016.

The Oil Conundrum
The Economist, Jan 23, 2017

  • The International Energy Agency says ” the oil market could drown in oversupply”.  Storage facilities are being built but are filling up fast.

  • Oversupply does not necessarily lead to global economic growth.  In 2016, lower oil prices have coincided with turmoil in global stock markets.
     
  • The predicted surge in benefits for consumers has not happened, in part because oil-related capital spending in total business investment has declined.

  • If it is true that, as climate consciousness grows, oil companies are developing more natural gas than oil...but it may be too early to assume that the era of the petrol engine is coming to an end.

Saudi Arabia has declared an end to its oil war with the US (Steve LeVine)
Quartz June 23, 2016  (note date)

  • Two years after declaring war on upstart US shale (fracking) and therefore increasing oil production in order to drive down their competitors, Saudi Arabia says the need for the fighting is over.

  • In part, this is because Russia, Iran and Iraq have also increased its production.

  • There are nearly 2,000 drilled but not completely constructed wells in the US, and companies are beginning to bring those wells into production.

How Low Oil Prices are Transforming Global Politics in Startling Ways (Michael Klare)
Oil Price.com Jan 12, 2016  (Note date)

  • The continuing drop in oil prices may stretch to 2020 and beyond.  The drop is bound to translate into a profound shakeup in the political order, with petroleum-producing states from Saudi Arabia to Russia losing both prominence and geo-political clout.

  • When oil was selling at $115 (in 2008, it was $143 a barrel) a barrel, and when analysts were predicting that the price would remain well above $100 deep into the future, the giants invested hundreds of billions into “unconventional reserves” including Arctic oil and the Canadian tar sands, deep offshore reserves and dense shale formations.  The cost of exploiting most of these reserves is more than $50 a barrel.

  • China, as a consumer, was also a major driver of the formerly high prices. Although China’s oil demand (China is also a major a producer of oil, see chart) is expected to keep rising, it is not projected to grow at anything like the pace of recent years.

  • Under Obama’s plan, fuel efficiency in vehicles would have reduced oil consumption by 12 billion barrels by 2025.
  • The largest US producers have adjusted to the low-price environment, and US crude production was higher in 2016 than 2015.

  • Iraq and Iran are expected to increase their production significantly, although this might change if sanctions were to be re-imposed on Iran.

  • Prices for oil will rise someday, given that investors are currently pulling the plug on (yet to be constructed) energy projects globally.

ExxonMobil Earns $7.8 Billion in 2016, 1.7 Billion in the Fourth Quarter. 
Exxon Mobil Corporation: Public Company Information NYSE”XOM Jan 31, 2017
(Note that these figures are for 2016, prior to the Trump-era)

  • Although analysts suggest these numbers indicate lesser profitability, these numbers include a 2 billion write down mainly related to dry gas operations with undeveloped acreage in the Rocky Mountain region of the US.  Excluding the “impairment” charge, full year earnings were 9.9 billion, down from previous highs, but still healthy.

 

 US crude inventories rise by 5 million barrels, EIA says
CNBC March 20, 2017

  • The American Petroleum Institute said that US Inventories climbed by 4.5 million barrels (may be as high as 5 million)
  • US shale oil producers have been adding rigs.

Turkish Economic Association Discussion Paper 2012/52
(Note date)

  • The average revenue of BP, Shell, ExxonMobil, Gulf, Texas Oil and Chevron is higher then the GDP of 181 countries in the world today.
  • While oil producing countries used less than 70% of their production capacity in the 1990s, they have been extracting within the range of 80-100% since 1990.

 

 

Graph from “8 Reasons...” (see above)

 


Source material:

World Economic Forum:  The foundation that operates the World Economic Forum is funded by its 1,000 member companies, typically global enterprises with more than five billion dollars in turnover (varying by industry and region).  It sponsors Davos, and releases many research reports for its members.

International Energy Agency:autonomous intergovernmental organization established in the framework of the Organisation for Economic Co-operation and Development (OECD)

Quartz is published by Atlantic Media, journalists from Bloomberg, WSJ the Economist etc.

OilPrice.com is Tom Dispatch article and a product of The Nation magazine.


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